Mutual funds offload consumer discretionary stocks on GST concerns; buy FMCG

India Ratings, in a report, said the transition to GST will disrupt the working capital cycle of businesses in the initial phase and thus, easy liquidity in the system is essential for two to four months.

The implementation of GST may cause a shift in market shares leading to expansion of organised sectors in FY18 at the cost of unorganised sectors, according to ratings agency ICRA.

In its report, ICRA said the introduction of the GST is likely to reduce competitiveness of the unorganised sector. It said several short-term implementation challenges remain, which may increase compliance costs and raise working capital requirement for companies.

Although tax rates on goods will now be common across states, which would reduce the compliance burden for businesses, the multiplicity of slabs for goods and services suggests the tax structure would remain complex.

All capital goods and all industrial intermediaries will attract 18 percent tax instead of 28 percent. On the other hand, a few segments in the consumer durables will see a higher effective taxes and need to take price hikes to offset cost pressures from increased taxes. The GST Council has put items like refrigerators and ACs in the maximum 28 percent category.

"GST is a game changing reform that is widely awaited. It has the potential of adding almost 100bps to the GDP growth. Though the near term will see some challenges of implementation, It is one reform that will bring efficiency in the economy and widen the tax base." Sunil Singhania, Chief Investment Officer- Equity Investment, Reliance Mutual Fund.

Meanwhile, mutual funds have been picking up shares of FMCG such as HUL, Marico, ITC, Colgate Palmolive, Dabur, among others.

“We believe that the FMCG sector stands to benefit from the reduction in tax rates for soaps, toothpastes and adhesives to 18% from 22-26% currently. Similarly, indirect tax levy on lubricants has been lowered to 18% from 27-28%. We believe that companies might either pass on the benefit of lower duties to consumers to spur demand or retain it to derive margin benefits. Indirect tax levies have been broadly maintained for cigarettes, which, in our view, could auger well for the sector,” Motilal Oswal Securities said in its report on GST.

The Goods and Services tax or GST Council finalised the rate structure for most goods and services along with the GST compensation cess for various products.

In the GST rate schedule nearly 81 percent of items are in the 18 percent tax bracket or below and the remaining 19 percent at the highest 28 percent tax slab.

According to brokerage houses, broadly, the tax rate is neutral to positive for most FMCG sectors.

A report from Nirmal Bang-Institutional Equities states the current incidence of indirect tax on most FMCG items is in the range of 20-24 percent and, therefore, the proposal to tax some of the commonly used products such as soaps, hairoil and toothpaste at 18 percent is positive.

The tax proposals, to some extent, were consensus and, therefore, there is no major positive surprise for the Street.

According to brokers, in the last few days buying is also witnessed in Voltas, State Bank of Bank, GAIL, Reliance Industries, NIIT Ltd, among others.